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(from my colleague Ilan
Solot)
This is what has changed in the EM space, in our view:
1) Thailand: Officials are stepping up action and rhetoric
against THB appreciation
2) India: We are becoming more optimistic that the INR will
finally start to recover
3) Mexico: Banxico is sounding dovish again, but caution is
needed in interpreting comments
4) Indonesia: The IDR appear to be at an interesting cross road

1) Thai officials are stepping up action and rhetoric
against THB appreciation. We are not sure what is in the pipeline
after last week’s approval of the plan to use FX reserves to buy
debt from state-owned companies abroad, but more is coming for
sure. We have THB firmly in our short side of relative value
basket for EM, in our Trading FX Intervention Differentials
model.
On one hand, PM Shinawatra’s administration is pushing hard for
interest rate cuts, explicitly to “stop the baht from
appreciating further,” because it would, “send a very strong
signal psychologically.” On the other hand, the BoT stated that:
"The MPC expressed concern over recent volatility and rapid
appreciation of the baht, which, at times, have not been
justified by economic fundamentals [...] The committee therefore
agreed on the need for a timely implementation of appropriate
policy mix as warranted by circumstances, in close coordination
with the Ministry of Finance and other agencies.” You have been
warned.
2) We are becoming more optimistic that the INR will
finally start to recover. Overnight, Commerce Minister Sharma
said that there were discussions of opening FDI in the telecom
sector. This follows ratification of new rules to open India’s
retail sector to foreign investment which were approved at the
end of last year. The minister also added that India should relax
FDI limits on many sectors to attract foreign investments, which
could be used to bridge the current account deficit.
Aside from the obvious economic benefits, this is yet another
measure that will benefit the INR in the medium term, while also
helping to improve sentiment in the short term. USDINR broke
below the key 54.0 level after news that India will cut the tax
on interest payments for foreign institutional investors from 20%
to 5%, both for investment in government and rupee-denominated
corporate debt.
3) Banxico is sounding dovish again, but caution is needed in
interpreting comments. Central bank president Carsten’s comments
have elicited a shift in economists' calls. A rate cut, if it
does come, is several months away. At this point, we take this
change in tone from the “one and done” 50 bp cut more as a way to
gain some optionality rather than a statement of intention. Of
course more cuts are possible, but staying dovish and letting the
market take yields even lower may be a preferable
strategy.
Recall the Maradona Theory of Monetary Policy, which Banxico is
so skilled on. In the margin, we also suspect that the dovish
shift is related to the growing discomfort about MXN strength.
Suspending the USD auctions was the first alert, and more are
coming. Nevertheless, we remain bullish on the peso and
fundamentals in Mexico, even if volatility is set to increase in
the near term.
4) Indonesia and the IDR appear to be at an interesting cross
road. Here is a simplified summary of the state of affairs: (1)
The economy is overheated; (2) the currency is relatively weak ,
looking at 12-month performance; (3) the current account deficit
is wide but the trade balance is improving; (4) the imminent hike
in subsidized prices could provide an upside shock to inflation
of 1.6%, according to the central bank; (5) but this fuel price
hike will make a big difference in the fiscal accounts; (6) there
has been relatively little active policy making by the central
bank or government; (7) strong inflows into local asset with the
JCI index making new all time highs.
With the central bank unlikely to raise rates to counter
inflation, their options are limited to liquidity management
tools and possibly allowing the currency to do some of the work
on inflation. It’s not clear what route they will take, but
recent comments suggest that they will lean against further IDR
depreciation. In our view, the risk seems to be asymmetrical in
favour of a stronger currency.